A 'Generic' Solution through Trade

In today’s policy world, you really have no idea of what comes next. Republicans, once known as the free trade party, sat idly by as President Trump imposed a host of tariffs and pulled us out of deals they once championed. Meanwhile, Democrats—often derided by Republicans for fiscal irresponsibility—now sometimes push Republicans for less protectionism and savings in entitlement spending.

Take the issue of how much time biologic drugs should be given to command high monopoly prices before lower-priced generics can come on the market. The pending United States-Mexico-Canada Agreement (USMCA) offers an opportunity to rein in America’s prescription drug prices—along with entitlement spending—through freer trade.

House Democrats are reportedly drafting a letter in favor of the idea, calling for amendments to the USMCA “to increase competition and enhance patient access to more affordable prescription drugs.” However others, including Senate Finance Chairman Chuck Grassley (R-Iowa), are not so keen to do so.

Biologics are the fastest growing segment of the drug market. They are made from living organisms to treat a variety of medical conditions. Humira and Remicade, for example, are used to treat rheumatoid arthritis. Rituxan and Herceptin are used to treat certain cancers.

Like other pharmaceuticals, biologics are covered by patents. But in the United States and some other countries, biologics get extended periods of protection and data exclusivity not enjoyed by other pharmaceuticals. The industry argues that biologics are more complicated and difficult to make than traditional drugs, and patents alone are inadequate for safeguarding their intellectual property. But the longer the data exclusivity period, the longer secret formulas are kept under lock and key, thereby delaying lower-priced generics from coming on the market.

There is no official optimal data exclusivity period for biologics, and different countries have different periods. The United States tends to be on the higher end, at 12 years. Canada provides six years, Australia provides five years, and Mexico does not provide for any data exclusivity above and beyond patent protection.

In Trans-Pacific Partnership (TPP) negotiations, the United States advocated for 12 years, but most other countries resisted. Australia, Canada, New Zealand, Chile and others cited a lack of economic evidence for the benefits a longer period would provide. Eventually, all agreed on 10 years, which was longer than what most other countries wanted. When the United States later withdrew from TPP, the provision was promptly removed.

It appears that during the initial U.S.-Mexico bilateral portion of the USMCA negotiations, the United States coaxed Mexico into the longer waiting period of 10 years. Canada acquiesced when they rejoined the talks.

In their letter, House Democrats are now calling on the United States Trade Representative to adhere to the so-called “May 10” agreement from 2007. This bipartisan understanding would provide (among other things) five years of data exclusivity for biologics.

The Obama Administration also called for shorter exclusivity periods for biologic drugs, and included the corresponding $4.5 billion estimated cost savings in its budgets.

A reduction in drug costs would be a welcomed change for both patients and those concerned with entitlement spending. New specialty biologic drugs are driving large cost increases in entitlement spending on Medicare and Medicaid. Prescription drugs account for nearly $1 out of every $5 in Medicare spending. Per capita drug spending on specialty drugs has increased drastically—by 55% from 2013 to 2016.

The Medicare Board of Trustees has warned that as the pharmaceutical pipeline shifts towards newer, higher-priced biologic drugs, there will be significant continued upward pressure on Medicare spending. The growth in expensive specialty drugs has been a major factor driving prescription drug costs, according to their 2018 annual report.

The U.S. economy has had to adjust to a host of protectionism measures coming from a Republican White House. Now, the Democrats are sounding the alarm on the effect of our trade policies on drug prices. Their suggested tweak to USMCA would allow us to scale back entitlement spending. While the world does seem upside down, this oddly seems like a good trade-off.

What's Next on the Bridge

Stay Updated

Follow everything happening at the Mercatus Center from week to week by subscribing to This Week at Mercatus. Each week, we will send you the latest in publications, media, and events featuring Mercatus research and scholars.

Email *

Support Mercatus

Your support allows us to continue bridging the gap between academic ideas and real-world policy solutions.Donate